The siren call of money market funds has gotten a little louder: With the Federal Reserve cutting interest rates unsustainable, cash yields remain hot — for now. After central bank policymakers last week highlighted a “lack of further progress” in reducing inflation, Wall Street reacted with widely varying expectations about the number of expected rate cuts. expected by 2024, from as few as one to as many as four. It also means that, at least in the short term, investors who hide in cash will be paid handsomely to do so: The Crane 100 Money Fund Index is showing a 7-day annualized current yield of 5, 13% as of May 8, and Bread Financial is offering a 1-year certificate of deposit with an annual percentage yield of 5.25%. But those who put too much money into these deposits risk missing out on the expected rise in bond prices once the Fed starts reducing interest rates. “Once the Fed cuts interest rates, yields on money market accounts will drop very quickly,” said Rob Williams, managing director of financial planning at Charles Schwab. Here’s how to decide where and when to repurpose some of your idle money into fixed income. Reality Check A general rule of thumb in financial planning is to have at least one expense a year in available cash, but setting aside any money beyond that amount will require you to look Review your goals and asset allocation in your investment portfolio. “Figuring out where to put that first dollar depends on what individuals are willing to achieve”. “What people may want to consider, regardless of what they invest in, is how sensitive the next dollar will be.” Key factors to consider when you’re deciding where to move some of your cash include interest rate sensitivity, credit risk and liquidity, he says. Duration – the bond’s sensitivity to interest rate changes – is also a key point. Bonds with longer maturities tend to have larger maturities, but they can also see the most dramatic price swings as interest rates fluctuate, compared to bonds with shorter maturities. Diversification is also important. “Spread your fixed income investments across a variety of sectors, such as government, corporate and municipal bonds, and across different maturities,” says Lawrence. Taxes are also an important factor to consider as you build your fixed income fund. The interest you receive from corporate bonds, CDs, and money market funds is subject to ordinary income taxes, which can be up to 37% depending on your tax bracket. Meanwhile, interest income from the Treasury is subject to federal income tax but is exempt from state and local taxes. Municipal bonds provide tax-free income at the federal level, but may also be exempt from state taxes if the investor resides in the issuing state. These savings are especially meaningful for high-income investors in high-tax states, including New York, New Jersey and California. The tax treatment of fixed-income investments is also a factor in the accounts that end up holding those assets. For example, corporate bonds and the funds that hold them can be good competitors for tax-deferred accounts, but municipal bonds are better suited to taxable brokerage accounts because no hedging is required. they are exempt from taxes. “Highly rated municipalities with short maturities in the taxable brokerage sector are what we want for investors in higher tax brackets,” Williams said. Gradually move towards fixed income You don’t need to spread out your fixed income over a single day. For investors who are just starting to feel comfortable with the idea of extending their duration, Williams said, tiering CDs or Treasury bills can be a good first step. These ladders involve buying a portfolio of fixed income investments with different maturities and then when those assets mature you can reinvest the proceeds into a long instrument more limited. You can also dollar-cost average into fixed income and build those positions gradually. “This might involve saying, ‘Every month, every quarter, every year, I put this amount of money into an increasing allocation to bonds,’” Williams said. Dollar-cost averaging into a diversified mutual fund or ETF also gives investors easy exposure to fixed income, as opposed to buying individual bonds. Lawrence likes the idea of using individual bonds to build fixed-income funds – since investors who hold to maturity don’t have to worry as much about price fluctuations in the interim – but for those who tend to invest in bond funds, he prefers active rather than passive management. “Mutual funds can be an effective way to diversify, but I would lean more towards active management,” he says. “An active manager can take out the ugly part of the index and perform better on that front.”